Q&A Forum

Will there be a tax implication in providing loan by an LLC Company in Delware to its Group Company in Manila

The Company is planning to provide an interest free loan to its group company in Manila,Philippines. The Company which is advancing loan is a company incorporated in Delware as an LLC. What would be the tax implication in US for loans advanced to group companies outside US interest free

Answers

I've always used the IRS' long term Applicable Federal Rate for intercompany loans. The interest-bearing arrangements were really for purposes of ensuring treatment as loans and not capital contributions. With related parties in general, the interest will only be taxable/deductible for tax purposes when paid.

That said, you ought to check with your tax advisor(s). International tax rules can get complicated very quickly.

On its face, an interest free loan across borders would call the treatment into question. All cross border loans should be created on an arm’s length with "market interest rates" used. If you have no intention of paying this back and/or charging interest, your statutory accounts in the Philippines may consider this to be a contribution of capital. One of the advantages of an interest based loan is that it will allow you to pull cash out of the Philippines, but this assumes it is a profitable entity.

Above and beyond ensuring an appropriate interest rate, you need to consider: (1) how is the LLC taxed in the US (flow-through versus association taxable as a corporation) since that will impact various items; (2) withholding coming out of the Philippines -- remember many countries have trouble dealing with LLCs; (3) is this truly a loan or in substance might it be equity?

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